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General Business Education: Grade 12
General Business Education: Grade 12
EDUCATION
Student Textbook
Grade 12
Author:
Bantie Workie (MSc)
Editor:
Worku Mekonnen (Ph.D)
Reviewed by:
Helen Alemayehu
Fikadu Girma
Abraham Worke
The Federal Democratic Republic of Ethiopia received funding for GEQIP through credit/financing from
the International Development Associations (IDA), the Fast Track Initiative Catalytic Fund (FTI CF) and
other development partners – Finland, Italian Development Cooperation, the Netherlands and UK aid
from the Department for International Development (DFID).
The Ministry of Education wishes to thank the many individuals, groups and other bodies involved –
directly and indirectly – in publishing the textbook and accompanying teacher guide.
Every effort has been made to trace the copyright holders of the images and we apologise in advance
for any unintentional omission. We would be pleased to insert the appropriate acknowledgement in
any subsequent edition of this publication.
© Federal Democratic Republic of Ethiopia, Ministry of Education
First edition, 2003(E.C.)
ISBN: 978-99944-2-092-6
Developed, printed and distributed for the Federal Democratic Republic of Ethiopia, Ministry of
Education by:
Al Ghurair Printing and Publishing House CO. (LLC)
PO Box 5613
Dubai
U.A.E.
In collaboration with
Kuraz International Publisher P.L.C
P.O. Box 100767
Addis Ababa
Ethiopia
Second Edition 2007 (E.C.),
Reprinted in India by Tan Prints India Pvt. Ltd.
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or
transmitted in any form or by any means (including electronic, mechanical, photocopying, recording or
otherwise) either prior written permission of the copyright owner or a licence permitting restricted
copying in Ethiopia by the Federal Democratic Republic of Ethiopia, Federal Negarit Gazeta
,Proclamation No. 410/2004 Copyright and Neighbouring Rights Protection Proclamation, 10th year, No.
55, Addis Ababa, 19 July 2004.
Disclaimer
Every effort has been made to trace the copyright owners of material used in this document. We
apologise in advance for any unintentional omissions. We would be pleased to insert the appropriate
acknowledgement in any future edition.
Table of Contents
Page
UNIT 1: MARKETING ...................................................... 1
1.1 What is Marketing? ....................................................... 2
1.2 What is Market? .......................................................... 3
1.3 Major Marketing Functions ............................................... 4
1.4 Marketing Mix- Overview................................................. 6
MARKETING
Introduction
Marketing completes the basic mission of an economy. It tries to identify the needs
and wants of customers. Marketing avails products of a company at the right time,
moves goods to the appropriate place and tries to determine the market size, converts
the heterogeneous market into homogeneous through market segmentation.
Marketing approaches the market with distinct marketing mix.
The role of marketing in society is significant. Have you ever gone to your nearest
market? What did you do? Did you buy products? Why did you buy the product? Did
you sell any thing? Did you communicate with the seller? Did the seller force you to
buy his product? Answer to these questions will help you to understand how
marketing plays important role to satisfy your needs and wants.
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For exchange to take place, there are certain conditions. At least two parties (seller
and buyer) must participate. Each party must have something of value to the other
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such as product or money. Each party also must want to deal with the other party.
Each must be free to accept or reject the other's offer. Finally, each party must be
able to communicate and deliver the product or money.
When the exchange actually occurs, it takes the form of a transaction.
For example, Abebech gives Fatuma Birr1.50 and gets pen in return. A trade of
value takes place. There are also some conditions in transaction. It involves at least
two things of value (product and money), agreed-upon conditions, a time of
agreement, and a place of agreement.
Product: People satisfy their needs and wants with products. Product is anything
that can be offered to a market for attention, acquisition, use or consumption that
might satisfy a want or need. It includes physical objects, services, persons, places,
organizations, heritage, hospitality, and ideas. But, for convenience, we classify offers
as goods and services but collectively as product.
Customer Value: Customer value is the difference between the values the customer
gains from owning and using a product and the costs of obtaining the product.
Customer Satisfaction: Customer satisfaction depends on a product's perceived
performance in delivering value relative to a buyer's expectations. If the product's
performance falls short of the customer's expectations, the buyer is dissatisfied. If
performance matches expectations, the buyer is satisfied. If performance exceeds
expectations, the buyer is delighted.
Activity: 1
Define marketing and the basic concepts used in your definition using
your own words.
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We may say that a certain market is big or small. The size of a market depends on
the number of people who exhibit the need, have resources to engage in exchange,
and are willing to offer these resources in exchange for what they want.
Markets are broadly classified as consumer and industrial markets. Consumer
markets consist of purchasers and/individual household members who intend to
consume or benefit from the purchased products and who do not buy products to
make profits.
Industrial markets or also known as business-to-business markets are grouped
broadly into producer, reseller, governmental, and institutional categories. These
markets purchase specific kinds of products for use in producing other products, for
resale or for day-to-day operations.
Producer markets consist of individuals and business organizations that buy certain
products to use in the manufacture of other products.
Reseller markets consist of intermediaries such as wholesalers and retailers that
buy finished products and sell them for a profit.
Government markets consist of Federal, Regional, Zonal, Woreda and Municipality
Governments. They buy goods and services to maintain internal operations and to
provide citizens with such products as highways, education, water, energy, police,
national defence and the like.
Institutional markets include churches, not-for-profit schools and hospitals,
teacher's associations, labour unions, foundations, human right group, fraternities,
charitable organizations. The goals of such organizations are different from business
organizations.
Activity: 2
The marketing process involves eight major functions and numerous related
activities. All these functions are essential if the marketing process is to be effective.
These functions are broadly classified as exchange, physical distribution and
facilitating functions.
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1. Buying includes obtaining raw materials to make products, knowing how much
merchandise to keep on hand, and selecting suppliers.
2. Selling creates possession utility by transferring the title of a product from seller to
customer. Possession utility is created by transferring title or ownership of a
product to the buyer.
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Activity: 3
Form a group of five to ten students in your class. And then list the basic
marketing functions in any organization that are necessary to satisfy the
needs and wants of customers and identify typical examples of each
function from your area.
Price: This element determines what a provider is paid. Various price setting models
exist with decisions relating to factors like market penetration, credit terms, discount
policy and cost of provision.
Place: Place is perhaps more readily described as distribution. It is about making the
product available. Some form of structured network is normally required – a
distribution channel. However, true marketing power may lie with the control of this
channel as opposed to control of the product. For example, large supermarket chains
can largely determine which goods are made available to the consumer.
Promotion: The promotional element of the mix provides communication with the
desired customer group. A range of mechanisms can be deployed for this purpose:
advertising, public relations, direct mail, Internet marketing, selling and sales
promotion. The blend of methods is often referred to as the communications mix.
Generally, promotion aims to make a target market aware of a product offering,
develop a long-term relationship with the customer and create and stimulate
demand. The effect of promotional techniques can be difficult to evaluate and
organizations need clear aims and goals to obtain maximum benefit from a
promotional budget.
1.4.1 Product
Can you mention some products that are familiar to you?
What is a product? A product is a bundle of physical, service and symbolic attributes
designed to produce consumer want satisfaction. Product elements include quality
/features, options/ style, brand name, packaging /sizes, service, warranties/
returns. To further understand the nature of products, it is better to see the
classifications of goods.
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Consumer goods: Consumer goods are intended for use by household consumers for
non-business purposes, and can be broken into four categories – convenience goods,
shopping goods, specialty goods and unsought goods.
1. Specialty goods are goods with unique characteristics and / or brand
identification, for which a significant group of buyers are habitually willing to
make a special purchasing effort. Buyers have a strong brand preference and are
willing to spend extra time and effort in buying them. Usually manufacturers can
utilize fewer retail outlets, which the manufacturer deals with directly. Advertising
is often carried out on a co-operative basis.
Some examples could be specific brands and types of cars, hobbies equipment,
photographic equipment, computer equipment. A sports car or racing car is a
specialty good if potential buyers are willing to travel to the few dealers.
Specialty goods do not involve shopping comparisons; the buyer only invests
shopping time to reach the outlets carrying these goods. The seller of a
specialty good does not necessarily have to be established in a convenient
location; however, it is important that prospective buyers receive information as
to this location.
2. Convenience goods are those that the consumer has adequate knowledge of the
particular product wanted before going out to buy it. The product is purchased
with a minimum of effort, and usually the advantages of shopping around to
compare price and quality are not considered worth the extra time and effort
required. Consumers are willing to accept any of several brands and will buy the
one that is most accessible. Goods in this category include groceries, tobacco
products, inexpensive confectionery, pharmacy items such as toothpaste and
hardware items such as light bulbs and batteries. Convenience goods typically are
purchased frequently, have a low unit price, are not bulky and are not greatly
affected by fad and fashion.
3. Shopping goods are products for which customers usually wish to compare
quality, price and style in several stores before making their purchase. Goods in
this category include women’s apparel, furniture, major appliances and cars.
Usually these goods are sold direct to the store by the manufacturer with no
wholesalers involved. The name of the store is often more important than the
brand of the goods.
4. Unsought goods fall into two categories - new products that consumers are not
yet aware of (e.g. video telephones, talking computers) and products that the
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consumer does not currently require such as insurance. Sellers and marketers of
this category of products face significant advertising and selling barriers.
Business goods [industrial goods]: Business goods are intended
primarily for use in producing other products or for providing services in a
business. They are raw materials, fabricating materials and parts, installations,
accessory equipment and operating supplies.
1. Raw materials are business goods that will become part of another physical
product, and include goods in their natural state such as minerals, land and
products of the forests and the seas, as well as agricultural products such as
wheat, cotton, fruits, vegetables, livestock and animal products like eggs and
milk.
2. Fabricating materials and parts include pig iron being converted to steel, yarn
being woven into cloth, and flour becoming part of bread. To ensure adequate and
timely supply, buyers usually purchase in large quantities and may place orders
twelve months or more in advance. These goods are usually marketed direct to
the user.
3. Installations include long-lived, expensive, major equipment of a business user,
such as generators, industrial buildings, railway engines and aircraft. High levels
of personal selling by skilled staff are usually involved with no use of
intermediaries. Often the product is supplied to the buyer’s detailed specification,
involving much pre sale and post sale servicing.
4. Accessory equipment is used in the production operations of a business, and
includes items such as cash registers, small power tools, forklift trucks and
computers. These goods are usually sold by intermediaries.
5. Operating supplies are the ‘industrial goods’ of the business sector. They are
short-lived, low price items usually purchased with a minimum of effort, and aid
a firm’s operations but do not become part of the finished product. Examples
include lubricating oils, pencils and stationery and cleaning supplies.
Like human beings, products also have their own life-cycle. From birth to death
human beings pass through various stages e.g. birth, growth, maturity, decline and
death. A similar life-cycle is seen in the case of products. The product life cycle goes
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through multiple phases, involves many professional disciplines, and requires many
skills, tools and processes. The stages include introduction, growth, maturity and
decline. The features of these stages are given in the following table.
Table 1.1 The four main stages of a product's life cycle and the accompanying
characteristics
Stage Characteristics
1. costs are very high
2. slow sales volumes to start
3. little or no competition
1. Introduction stage
4. demand has to be created
5. customers have to be prompted to try the product
6. makes no money at this stage
1. costs reduced due to economies of scale
2. sales volume increases significantly
3. profitability begins to rise
2. Growth stage 4. public awareness increases
5. competition begins to increase with a few new players in establishing
market
6. increased competition leads to price decreases
1. costs are lowered as a result of production volumes increasing and
experience curve effects
2. sales volume peaks and market saturation is reached
3. increase in competitors entering the market
3. Maturity stage
4. prices tend to drop due to the proliferation of competing products
5. brand differentiation and feature diversification is emphasized to maintain
or increase market share
6. Industrial profits go down
1. costs become counter-optimal
2. sales volume decline or stabilize
4. Decline stage 3. prices, profitability diminish
4. profit becomes more a challenge of production/distribution efficiency than
increased sale
The graphical representation of the product life cycle is shown in Figure 1.2.
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sales
Time
Figure 1.2 Product Life Cycle
Duration of stages: Some would argue that the length of each PLC phase is closely
related to marketing decisions and not simply a natural cycle. Effective marketing
should be able to extend and sustain the growth or maturity of a product offering.
Equally, ineffective marketing would hasten its decline.
Activity: 4
1.4.2 Price
All profit making organizations and many non-profit organizations must set prices on
their products or services. Price goes by many names: rent for house, tuition for
education, and a fee to physician or dentist, fare for taxi, interest for money,
premium for insurance, honorarium for guest lecturer, dues for trade association,
salary for an executive, commission for a salesperson, wage for a worker, bribe for a
bureaucrat etc.
In the narrowest sense, price is the amount of money charged for a product or
service. More broadly, price is the sum of all the values that consumers exchange for
the benefits of having or using the product or service.
Price is the only element in the marketing mix that produces revenue; all other
elements represent costs. Price is also one of the most flexible elements of the
marketing mix as it can be adjusted easily. The following subtopics discuss price and
non-price competition, pricing objectives and the different approaches to pricing.
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Price competition occurs when a seller emphasises the low price of a product and
sets a price that equals or beats competitors' prices. To use this approach most
effectively, a seller must have the flexibility to change prices often and must do so
rapidly and aggressively whenever competitors change their prices. Price competition
allows a marketer to set prices based on demand for the product or in response to
change in the firm's finances. Competitors can do likewise, however, which is a major
disadvantage of price competition. They, too, can quickly match or outdo an
organization's price cuts. In addition, if the circumstances force a seller to raise
prices, competing firms may be able to maintain their lower prices.
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Pricing Objectives
Before setting prices for a firm's products, management must decide what it expects
to accomplish through pricing. That is, management must set pricing objectives that
are in line with both organizational and marketing objectives. Of course, one objective
of pricing is to make profit. But this may not be a firm's primary objective. One or
more of the following factors may be just as important.
Survival: A firm may have to price its products to survive either as an organization or
as a player in a particular market. This usually means that the firm will cut its price
to attract its price, even if it then must operate at a loss. However, such a goal can
hardly be pursued on a long-term basis, for consistent losses would cause the
business to fail.
Profit maximization: Many firms may state that their goal is to maximize profit, but
this goal is impossible to define or to achieve. What, exactly, is the "maximum profit"?
How does a firm know when it has been reached? Firms that wish to set profit goals
should express them as either specific Birr amounts or percentage increases over
previous profits.
Market share goals: A firm's market share is its proportion of total industry sales.
Some firms attempt, through pricing, to maintain or increase their share of the
market. To gain market share, firms will set price as low as possible.
Cost-Based Pricing
Cost-plus Pricing: The simplest pricing method is cost-plus pricing- adding a
standard mark up in the cost of the product.
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Procedure: To understand mark-up pricing, you must understand the steps followed
by a firm when using the technique:
Estimate the sales volume;
Estimate product unit cost at the estimated sales volume;
Determine the mark-up rate to be used;
Calculate unit-selling price by applying the mark-up rate to the product cost.
Example: Price the following product using straight mark-up pricing:
Given:
Estimated Sales Volume = 1,000 units
Estimated Unit Cost = Birr80
Mark-up Rate = 20%
Breakeven Analysis and Pricing: Setting price to break even on the costs of making
and marketing a product.. Break-even point is a point in a graph or mathematical
model where cost equals revenue. For any product, the break even quantity is the
number of units that must be sold for the total revenue (from all units sold) to equal
the total cost (of all units sold). Total revenue is the total amount received from the
sales of a product. We can estimate projected total revenue as the selling price
multiplied by the number of units sold.
The costs involved in operating a business can be broadly classified as either fixed or
variable costs. A fixed cost is a cost incurred no matter how many units of a product
are produced or sold. Rent, for example, is a fixed cost. It remains the same whether
1 unit or 1,000 units are produced. A variable cost is a cost that depends on the
number of units produced. The cost of fabricating parts for a television is a variable
cost. The more units produced, the higher the cost of parts. The total cost of
producing a certain number of units is the sum of the fixed costs and the variable
costs attributed to those units.
If we assume a particular selling price, we can find the breakeven quantity either
graphically or by using a formula. Figure 1.3 graphs the total revenue earned and the
total cost incurred by the sales of various quantities of a hypothetical product.
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Total
Revenue
Profit
Total
Cost
$80,000 Variable
Costs
Costs/Revenue
Breakeven
Point
$40,000
Loss
Fixed cost
With fixed costs of Birr 40,000 variable costs of Birr60 per unit, and a selling price of
Birr120, the break even quantity is 666.67 units. To find the breakeven quantity, first
deduct the variable cost from the selling price to determine how much money the sale
of one unit contributes to offsetting fixed costs. Then divide that contribution into the
total fixed costs to arrive at the breakeven quantity. If the firm sells more than
666.67 units at Birr120 each, it will earn a profit. If it sells fewer units, it will suffer a
loss.
So, this company needs revenues of Birr80,000 just to cover costs. If it doesn't have
enough business at these rates, it loses money by being in business. If it makes more
than Birr80,000 in revenue, it's making money.
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Where unit contribution margin = Selling Price per Unit Variable cost per unit
Target rate- of -return pricing: It is similar to the mark up pricing in that profit
volumes are added to estimated costs. However, profit figures are note calculated
based on the cost of labour and material required to provide the product. Instead,
profit is calculated based on the financial investment required to provide the product,
the return needed to attract that investment, and estimated sales volume.
Procedure: Follow these steps to determine price using rate -of –return pricing
approach.
Determine desired rate of return on investment;
Estimate investment required;
Estimate level of sales;
Estimate unit cost at the projected sales level;
Calculate desired unit profit;
Calculate unit-selling price(estimated cost +desired profit)
Example: Price the following product using rate of return pricing approach.
Given: Desired rate of return =20%
Estimated investment required =Birr 600,000
Estimated sales =5,000 units
Estimated unit cost =Birr 80.
Calculate:
A. Desired profit volume .
B. Profit per unit.
C. Unit selling price.
Solution:
A. Desired profit volume =desired rate of return estimated investment required.
=20%×Birr 600,000
=Birr 120,000
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B.Profit per unit =desired profit volume =Birr 120,000=Birr 24 per unit.
Estimated sales 5,000 units
C.unit selling price = unit cost +unit profit =Birr 80 +Birr 24 =Birr 104
Activity 5
What is the number of units to be produced if the firm desires to make a
profit of Birr10,000 assuming the fixed cost, variable cost per unit and
selling price per unit are Birr50,000, Birr10 and Birr20 respectively
Going-Rate Pricing: In the going-rate pricing, the firm bases its price largely on
competitor's prices, with less attention paid to its own costs or to demand. The firm
might charge the same, more, or less than its major competitors depending on its
strategy.
Sealed-Bid Pricing: Competition-based pricing is also used when firms bid for jobs.
Using sealed-bid pricing, a firm bases its price on how it thinks competitors will
price rather than on its own costs or on the demand. The firm wants to win a
contract, and winning the contract requires pricing less than other firms.
Activity: 6
What is price and how do marketers set their prices as you see in your
locality?
1.4.3 Place/Distribution
How do producers reach their customers?
There are a number of channels for the distribution of goods. In this part of the
lesson, we will discuss the distribution channels for consumer and industrial goods.
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possible, Addis Tyre Factory markets its tires through its own outlet (of course
only in Addis Ababa) and other retail outlets as well through independent
wholesalers and retailers. The pictorial representation is shown in figure 1.4.
Producer Consumer
Consumer
Retailer
Producer Wholesaler
Retailer Consumer
Producer Agent Wholesaler
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Channel Decision
How does a producer decide to which distribution channels (and which particular
intermediaries) to use? Like every other marketing decision, the decision for channel
choice should be based on all relevant factors. These include the firm's production
capabilities and marketing resources, the target market and the buying patterns of
potential customers and the product itself. The factors for choice of channel of
distribution are discussed here below:
Product Consideration: The total value of a product influences the amount of funds
available for distribution. Management must also consider the cost of freight and
handling in relation to the total value of the product. If the product is perishable,
then it necessities short channel of distribution. If it is technical in nature, it will
often be distributed directly to the industrial users.
Middlemen Consideration: A producer should select middlemen who will provide the
marketing services that he himself is unable to perform. Sometimes, the middlemen
whom a producer desires may not be valuable. As a result the manufacturer may
have to alter entire channel.
Cost: Cost is the most important point that must be considered while choosing
suitable channel. Cost must be measured with respect to functions performed by
middlemen.
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i. Intensive distribution is the use of all available outlets for a product. The
producer that wants to give its product the widest possible exposure in the market
place chooses intensive distribution.
ii. Selective distribution is the use of only a portion of the available outlets for a
product in each geographic area. Manufacturers of goods such as furniture, major
home appliances, and clothing typically prefer selective distribution.
iii. Exclusive distribution is the use of only a single retail outlet for a product in a
large geographic area. Exclusive distribution is usually limited to very prestigious
products. It is appropriate, for instance, for specialty goods such as expensive
jewellery.
Activity: 7
Identify the six common types of channels and also list the factors for the
choice of channels of distribution.
1.4.3.1.1 Wholesalers
Wholesaler is a middleman that sells products to other firms. Wholesale transactions
are all transactions except the transaction with the ultimate consumer. Wholesalers
may be the most misunderstood of marketing intermediaries. Producers some times
try to eliminate them from distribution channels by dealing directly with retailers or
consumers. Yet, wholesalers provide a variety of essential marketing service.
Although wholesalers can be eliminated, their functions cannot be eliminated. The
basic functions must be performed by other channel members or by the consumer or
ultimate user. Eliminating a wholesaler may or may not cut distribution costs.
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important functions to retailers. You may ask the basic question of why we use
intermediaries such as wholesalers.
The first reason for the use of wholesalers is to improve exchange efficiency.
There are certain costs associated with an exchange such as negotiation, preparing
invoices, assisting customers in product selection and the like. We, therefore, need to
try to reduce the number of transactions (exchanges). Without an intermediary, each
buyer has to negotiate and exchange with each seller. With one intermediary, each
buyer negotiates with one intermediary and each seller negotiates with one
intermediary as opposed to many buyers.
The second reason is that intermediaries are specialists in the exchange process,
provides access to and control over important resources for the proper functioning of
the marketing channel.
place-the variety of goods that retailers would otherwise have to buy from many
producers. And wholesalers provide assistance in three important areas. These are
promotion, market information and financial aid.
Promotion. Some wholesalers help promote the products they sell to retailers.
These services are usually either free or performed at cost. Wholesalers, for
example, are major sources of display materials designed to stimulate emotional
buying. They may also help retailers build effective window, counter, and bin
displays. They may even assign their own employees to work on the retail sales
floor during special promotions.
Financial Aid. Most wholesalers provide a type of financial aid that retailers often
take for granted. By making quick and frequent deliveries, wholesalers enable
retailers to keep their own inventory investments small in relation to sales. Such
indirect financial aid reduces the amount of operating capital retailers need. In
some trades, wholesalers extend direct financial assistance through long-term
loans. Others extend sales on credit basis to retailers.
Types of Wholesalers
Wholesalers generally fall into three categories. They are merchant wholesalers;
commission merchants, agents and brokers; and manufacturers' sales branches and
sales offices.
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Because sales branches are owned by producers, they stock mainly the goods
manufactured by their own firms. Selling policies and terms are usually established
centrally and then transmitted to branch managers for implementation.
Activity: 8
Identify the major functions that wholesalers can perform to the producers
and retailers.
1.4.3.1.2 Retailers
A retailer is a middleman that buys from producers or other middlemen and sells to
consumers. Retailers are the final link between producers and consumers. Retailers
sell not only goods but also such services as repairs, haircuts, and tailoring. Some
retailers sell both goods and services. For example, an automobile dealer may sell
automobiles and maintenance service to its customers. Generally, retailers can be
classified as store and non-store retailers.
Retailers according to number of stores owned and operated by a firm . One way
to classify retailers is by the number of stores owned and operated by the firm.
An independent retailer is a firm that operates only one retail outlet. The majority of
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A chain retailer is a company that operates more than one retail outlet. By adding
outlets, chain retailers attempt to reach new geographical areas. As sales increase,
chains may buy merchandise in larger quantities and thus take advantage of
quantity discounts. They also get more power in their dealings with suppliers in
terms of services they get.
Corporate Chains/Chain Stores are two or more outlets that are commonly
owned and controlled, have central buying and merchandising, and sell similar
lines of merchandise. They appear in all types of retailing. But, they are strongest
in department stores, variety stores, food stores, drugstores, shoe stores, and
women's clothing stores. They achieve economies of scale through central buying for
different stores. This allows them to take advantage of quantity discounts. They also
have advantages in promotion and management by sharing the costs to many
stores.
Retailers according to size and the kind and number of products carried
Still, another way to classify in-store retailers is by size and the kind and
number of products carried. The most common ones in this category are
department stores, discount stores, Catalog and Warehouse Showrooms as
elaborated below:
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system, a department store is a retail store that (1) employs twenty-five or more
persons, and (2) sells at least home furnishing, appliances, family apparel, and
household linens and dry goods. Each must be located in the different parts of the
stores. Department Stores are service oriented. They provide credit, delivery,
personal assistance, liberal returns policies, and pleasant shopping atmospheres.
Warehouse showrooms are retail facilities with five basic characteristics: (1) large,
low-cost buildings, (2) warehouse materials-handling technology such as crane or
ladder, (3) vertical merchandise displays, (4) large on-premises inventories, and (5)
minimal service. Furniture retailers use such systems. These operations employ
few personnel and offer few services.
Convenience Stores. A convenience store is a small food store that sells a limited
variety of products but remains open beyond normal business hours. Their prices
are high since they are open for long hours such as up to midnight or sometimes
even for 24 hours.
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Superstores. A Superstore is a large retail store that carries not only food and
non-food products normally found in supermarkets but also additional product
lines such as housewares, hardware, small appliances, clothing, personal care-
products, garden products, and automotive merchandise. Superstores also provide
a number of services to entire customers. Typically, these include automotive
repair, snack bars and restaurants, film developing, and banking.
Off-price Retailers. Off-price retailers are stores that buy manufacturers' seconds,
overruns, returns, and off-seasonal merchandise at below-wholesale prices and sell
them to consumers at deep discounts. Off-price retailers sell limited lines of
national brand items, usually clothing, shoes or house wares. But they offer
limited customer services. Manufacturers may use their own outlets to sell
overstocks and unsold merchandise from other retail outlets at deep discounts.
Category Killer. A category killer is a very large speciality store that concentrates
on a single product line and competes by offering low prices and an enormous
28 General Business Education Grade 12
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number of products. These stores are called category killers because they take
business away from smaller, high-cost retail stores.
Limited-service Retailers: Provide more sales assistance because they carry more
shopping goods about which customers need information. Their operating costs are
higher resulting in higher prices.
Full-service Retailers: Salespeople assist customers in every phase of the
shopping process. They carry usually more specialty goods for which customers
like to be "waited on." They provide more liberal return policies, various credit
plans, free delivery, home serving, and extras such as lounges and restaurants.
More services result in much higher operating costs, which are passed along to
customers as premium or higher prices.
Central Business District. They are retail clusters with department stores, speciality
stores, banks, and movie theatres. They are usually located in downtowns.
General Business Education Grade 12 29
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shopping centre. The largest shopping centres contains between 40 and 100
stores attracting customers from wide area.
Community Shopping Centres: A community shopping centre includes one or
two department stores, along with convenience stores. They normally contain a
branch of a department store, supermarket, speciality stores, and sometimes a
bank.
Neighbourhood Shopping Centres: They generally contain 5-15 stores. They are
close and convenient for consumers. They usually contain a supermarket, perhaps
a discount sores, and several service stores, dry cleaner, self-service laundry,
drugstore, video-rental outlet, barber or beauty shop.
Activity: 9
Visit any retail stores in your nearest market. List the services it provides
by asking the shopkeeper. Classify the retailer into one of the retailers
discussed in the previous section.
List and explain the marketing intermediaries.
Door-to-door selling means going directly to the customers' home for sale. It gives
consumers the opportunity to buy at home or another convenient non-store location.
However, with the changing roles of women (women now working outside home),
direct selling firms find new ways of making contact with potential customers. As the
result office-to-office and house sales parties appear in the place of door-to-door
retailing.
30 General Business Education Grade 12
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The disadvantage is that direct selling is the most expensive form of retailing due to
higher costs for sales commission. This resulted in higher prices for customers.
Direct Marketing. Direct marketing is the use of the telephone and nonpersonal
media to communicate product and organizational information to customers, who
can then buy products by mail or telephone. Catalog marketing, direct-response
marketing, telemarketing, television home shopping, and online marketing are all
types of direct marketing.
Television home shopping displays products to television viewers, who can then
order them by mailing a toll-free number and paying by credit card. However, there
must be shopping cable channels to use this method. The most common products
sold through television home shopping are electronics, clothing, housewares, and
jewellery
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fruits, chewing gum, postage stamps, hot and cold beverages, perfume and
cosmetics. Machines offer banking service around the clock.
Activity: 10
Which one of the non-store retailing methods are found near your school
for the selling of goods to customers.
1.4.3.2 Warehousing
Warehousing is the set of activities involved in receiving and storing goods and
preparing them for reshipment. Goods are stored to create time utility; that is, they
are held until they are needed for use or sale. Warehousing includes the following
activities:
Receiving goods--- The warehouse accepts delivered goods and assumes
responsibility for them.
Identifying goods--- Records are made of the quantity of each item received.
Items may be marked, coded, or tagged for identification.
Sorting goods--- Delivered goods may have to be sorted into different classes
before being stored.
Dispatching goods to storage--- Items must be moved to specific storage
areas, where they can be found later.
Holding goods--- The goods are kept in storage under proper protection until
needed.
Recalling, selecting, or picking goods--- Items that are to leave the
warehouse must be efficiently selected from storage.
Marshalling Shipments--- The items making up each shipment are brought
together, and the shipment is checked for completeness. Records are prepared
or modified as necessary.
Dispatching Shipments--- Each shipment is packaged suitably and directed to
the proper transport vehicle. Shipping and accounting documents are
prepared.
Types of Warehouses
Warehouses may be classified in different ways. But the most common and simple
method of classification is according to ownership. A firm may either use its own
warehouse or rent space in public warehouses. A private warehouse is owned and
operated by a particular firm. It can be designed to serve the firm's specific needs. It
32 General Business Education Grade 12
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is often built for specialized user needs. However, the organization must take on the
financing the facility, determining the best location for it, and ensuring that it is used
fully. Generally, only companies that deal in large quantities of goods can justify
private warehouse.
Public warehouses offer their services to all individuals and firms with fee. Public
warehouses operate in a manner similar to the common carriers in transportation.
That is they provide services on a fee basis to a number of users. Public warehouses
are good for users who need to expand or contract (reduce) storage space in a short
period of time. Most are huge, one-story structures on the outskirts of major cities,
where truck transportation is easily available. They provide storage facilities, areas
for sorting and marshalling shipments, and office and display spaces for wholesalers
and retailers. Public warehouses will also hold and issue receipts for goods used as
collateral for borrowed funds. Public warehouses provide general purpose storage
spaces.
Bonded Warehouses are used for items to be imported or exported. They are owned
by the government. Bonding arrangements are made with the government for certain
goods such as tobacco and liquor, on which taxes or duties are paid. The
arrangement is between the owner of merchandise and the government. In this
General Business Education Grade 12 33
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arrangement, the goods cannot be removed from the warehouse unless to another
bonded warehouse until the required taxes or duties are paid. The owner of the goods
benefits by not having to pay the taxes or duties until the time the goods are sold.
This minimizes the capital required in inventories or goods.
Activity: 11
1.4.3.3 Transportation
Transportation is simply the shipment of products to customers. The greater the
distance between seller and buyer, the more important is the choice of the means of
transportation and the particular carrier. For transportation, three things are
necessary. Firstly, a vehicle; secondly medium of movement like land, water or air or
terminal; and lastly power to run the vehicle must exist.
In addition, a shipper can hire agents called freight forwarders to handle its
transportation. Freight forwarders pick up shipments from the shipper, ensure that
goods are loaded on selected carriers. They also assume responsibility for the safe
delivery of the shipments to their destinations.
The Postal Service offers also parcel delivery. The posts office provides complete
geographic coverage at the lowest rates, but it limits the size and the weight of the
shipments it will accept. The Ethiopian postal service, for instance, provides express
mail services for delivery of some goods. This method is commonly used for mail
orders.
The six major criteria used for selecting transportation modes are cost, speed,
dependability, load flexibility, accessibility and frequency. Cost includes both
variable and fixed costs. Speed is measured by the total time that a carrier possesses
the products. The duration includes the time for pick up and delivery, handling, and
movement between point of origin and destination. Usually there is direct
34 General Business Education Grade 12
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relationship between cost and speed. This is, faster modes of transportation are more
expensive. A transportation mode's dependability is determined by the consistency of
service provided by that mode. Load flexibility is the degree to which a transportation
mode can provide appropriate equipment and conditions for moving specific kinds of
products and can be adapted for moving other kinds of products. For example,
certain types of products may need controlled temperatures or humidity levels.
Accessibility refers to a transportation mode's ability to move goods over a specific
route or network. Frequency refers to how often a marketer can ship products by a
specific transportation mode. Whereas pipelines provide continuous shipments,
railroads and waterways follow specific schedules for moving products from one
location to another.
Mode of Transportation
The common modes of transportation are (a) road, (b) railroads, (c) airplanes,
(d) waterways and (e) pipelines. In developing countries like ours, animal transport is
the dominant one.
a) Road
i) Animal transport. In ancient time, man used to carry goods on his/her head and
her back. This is still common in developing countries like Ethiopia. Then he/she
used animals like asses, horses and mules for carrying goods. These animals
are the major transportation means in rural Ethiopia and even in cities and towns
including Addis Ababa.
ii) Trucks. The trucking industry consists of common, contract, and private carriers.
Trucks can handle freight quickly and economically, and they carry a wide range of
shipments. Many shippers favour this mode of transportation. This is because it
offers door-to-door service, less stringent packaging requirements than ships and
airplanes, and flexible delivery schedules. Currently, truck transportation is the
most popular transportation amongst all other modes in Ethiopia. Trucks are also
necessary for goods to reach the railway station, port or airport. However, for
domestic transportation purposes, roads are the major instruments of
transportation.
nations, there is keen competition between trucks and railway because they are
both land transports. Railroads provide facility for quick transport of perishable
goods like eggs, milk, vegetables and fruits. Breakage and spoilage of goods in
transit is less because of less vibrations of vehicle affected by weather conditions.
c) Waterways. Cargo ships offer the least expensive but slowest form of
transportation. They are used mainly for bulky, non-perishable goods such as
iron ore, bulk wheat, motor vehicles, and agricultural implements. Of course,
shipment by water is limited to cities located on navigable waterways. The
common modes of transportation in waterways are rivers, canals, and sea:
i) Rivers: Provide a safe way for the carriage of goods and passengers. Transportation
of heavy goods is very easy and cheap to places located on the bank of river. In
Ethiopia, Baro is the only river that provides transportation services. Other rivers
in Ethiopia cannot provide transportation because of the difficulty of the
geographic terrains.
ii) Canals also provide a convenient highway for the carriage of goods and
passengers. Egypt gets millions of dollars from Suez Canal per day.
iii) Sea. Sea transport is the biggest mode of transport between one country and
another. Foreign trade is dependent mostly on maritime transport. As stated
above, it is the cheapest mode of transport.
d) Airplanes. Air transport is the fastest but most expensive transportation. All
certified airlines are common carriers. Supplemental or charter lines are contract
carriers. It saves much time and inconvenience for the carriage of passengers and
goods. Because of the high cost, lack of airport facilities in many areas, and
reliance on weather conditions, the share of airlines is the least in many countries.
Construction of runways is also very expensive.
e) Pipelines. Pipelines are a highly specialized mode of transportation. They are used
primarily to carry petroleum and natural gas. Pipelines have become more and
more important for those countries that have high demand for petroleum products.
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Activity: 12
Which mode of transportation is the most common in Ethiopia? What are
the possible reasons for that?
1.4.4 Marketing Promotion
Promotion is an organization’s communication with external publics, especially
customers and potential customers. The basic purpose of promotion is to inform
persuade and remind. Promotion is the function of informing, persuading and
influencing the consumers' purchase decisions.
Activity: 13
Explain the difference between newspaper and magazine and radio/tv
advertisement.
38 General Business Education Grade 12
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the other hand, controlling of marketing plans and programs deals with
measurement of results and evaluation of progress.
The detail discussion on marketing management is beyond the scope of this text
book. Some of you may specialize in marketing management when you join
universities next year. But, an economy dominated by small businesses such as in
Ethiopia, employers require management graduates in general areas to perform many
of the major functions of organizations. However, in developed nations, marketing
management is one of the prestigious fields of management studies. As a result,
marketing managers are highly paid ones among other professionals.
General Business Education Grade 12 39
1 Marketing
Summary
This unit addresses the basics of marketing and its basis functions as well as
the marketing mix. Marketing is defined as a social and managerial process by
which individuals and groups obtain what they need and want through creating
and exchanging products and value with others.
Market is a mechanism that brings buyers and sellers of product together..
Markets may be classified as consumer markets, industrial markets, reseller
markets, government markets and institutional markets.
The functions of marketing include buying, selling, transporting, storing,
financing, standardizing and grading, risk taking and gathering market
information. These marketing functions are also performed by middlemen such
as wholesalers or retailers.
Marketing mix is the mixture of marketing variables that an organization can
manipulate to approach the target market. They are known as the four P's;
namely product, place (distribution), promotion and price. A product is
everything one receives in an exchange, including attributes and expected
benefits. The product may be a manufactured item, a service, an idea, or some
combination of these. The sales and profit volumes of a product can be
estimated using the concept of the product life cycle. A channel of distribution
(place) is a sequence of marketing organizations that directs a product from the
producer to the ultimate user. Different products require different channels of
distribution. The main ones are direct and indirect (which may be long or short)
or both. .
Promotion is the function of informing, persuading, and influencing the
customer's purchase decision. The basic components of promotion are
advertising, personal selling, sales promotion and publicity as well as Internet
advertising.
40 General Business Education Grade 12
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Review Questions
General Business Education Grade 12 41
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42 General Business Education Grade 12
Unit 2 Unit Outcomes
At the end of this unit, students will be able to:
recognize concept of communication.
differentiate the various methods of
communication.
Introduction
Communication is very important for two basic reasons. Firstly, communication is
important for managerial tasks or duties such as planning, organizing, directing and
controlling. Secondly, communication relates an organization to the external
environment such as customers, suppliers, government offices, competitors, etc. The
purpose of this unit is to give a brief explanation of communication in organizational
and personal contexts. The major emphasis here will be on communication
effectiveness using different media.
Remember the definition of business you did learn in grade 11. When communication
is applied in business we say business communication. Therefore, in this context we
used business communication or simply communication interchangeably. The
If mutual understanding does not result from the transmission of symbols, there is no
communication. These symbols may be letters, numbers, pictures, facial expressions,
reports, audio, video, and the like. Or communication occurs when an exchange of
messages results in shared meaning. In other words, for communication to exist, the
idea in the mind of the sender must be identical or at least similar to the idea in the
mind of the receiver. Otherwise, there is no communication.
In organizations, the flow of information can be considered like the flow of blood in the
human body. Every member of an organization is a link in the information chain. One
of your first priorities as an employee should be to make sure that you are sending
and receiving the messages required to help your group function effectively.
To be effective communicator in your organization or your life, you should constantly
ask the basic question of communications namely "WHO? WHAT? WHERE? WHEN?
WHY? HOW?"
• WHO are the senders/receivers of this communication?
• WHAT is the core thought- the key idea, the main point – of this
communication?
• WHAT relates the core thought to both the sender's and receiver’s purposes?
• WHERE does the message strengthen relationships between sender and
receiver?
• WHEN was the message sent and received (or when will it be sent and received)?
• WHY was the message (or why will it be) sent?
• HOW does the message use sources and information?
• HOW was the message (or how should it be) worded?
• HOW was the message (or how should it be) transmitted?
Activity: 1
• Why one should ask the WH (who, what, where, how) questions in
communication?
• Define communication using your own words.
44 General Business Education Grade 12
2 Communication
Activity: 2
1 8 7
Sender Has an Idea Audience Sends Feedback Audience Reacts to
Message
2 6
Sender Encodes the idea NOISE Audience Decodes Message
3 4 5
Sender Produces Message Sender Transmits Message Audience Receives
Message
By viewing communication as a process, such as the above, you can identify and
improve the skills that you need to be more successful.
1. The sender has an idea.
2. The sender encodes the idea as a message.
3. The sender produces the message in a transmittable medium.
4. The sender transmits the message through a channel.
5. The audience receives the message.
The following process of communication is another model which can be seen from the
receiver, sender and medium of communication perspective with more elaboration.
Sender/Encoder Receiver/Decoder
Message: Verbal,
• Communication skills nonverbal • Communication, skills
attitudes and NOISE attitudes and experiences
experiences
Channels:
Formal, Informal • Mental abilities
NOISE
• Mental abilities Feedback: Verbal, non-
verbal
a. The communicator. The communicator is the person who intends to make contact
with the objective of passing information or idea to the other. Your teacher in front
of you is a communicator. However, communicators in an organization can be
managers, non-mangers, departments, or the organization itself. Managers
communicate with other managers, subordinates, supervisors, customers, and
parties outside the organization.
b. Encoding. Idea is abstract and intangible and its transmission requires the use of
certain symbols. Probably, you may use some code to communicate with your
friends somewhere and some place. A code in this case is a language known only by
you and your friend. The sender may used verbal, nonverbal or written means of
coding his/her message.
c. The message. The result of the encoding process is the message. The purpose of
the communicator is expressed in the form of messages. The messages can be either
verbal or nonverbal.
d. The medium. The medium is the carrier of the intended message. Communicators
provide information to their receivers by a variety of means. These include face-to-
face communication, telephone, short mobile messages (SMS), group meetings,
computers, memos, policy statements, reward systems, bulletin boards, production
schedules, company publications, and sales forecasts.
General Business Education Grade 12 47
2 Communication
e. Decoding. Decoding refers to the process by which receivers translate the message
into terms meaningful to them. If the message in the mind of the sender and the
message in the mind of the receiver are the same, then, understanding takes place.
Otherwise, there is no communication.
f. The receiver. Receiver is the person to whom the message is meant for or sent.
Communication requires a receiver who must be taken into account when a
communicator attempts to transmit information.
g. Noise. Noise is any element or condition that disturbs or interferes with effective
sending and receiving of information. Disturbances can occur at any point in the
communication process. The sender may use unclear symbols. The receiver may not
be ready to receive message. The telephone line may be noisy. The image in the
television screen may be vague. The memos may be poorly produced.
h. Feedback. Feedback enables the communicator to determine if the message has
been received and if it has produced the intended response. One-way
communication processes do not allow receiver-to-communicator feedback. Two-
way communication processes, however, do. Feedback may come in many ways.
Your teacher may ask questions regularly to measure your level of understanding.
Tests and examinations are given to measure level of understanding in the class.
Your teacher may observe your facial expressions as a feedback for adjusting
his/her teaching style. All these are examples of feedback mechanisms to the
communication process in the classrooms. In organizations, periodic reports,
performance reports, accounting reports, audit reports and the like serve as
feedback for managers to make adjustments in managing their organizations.
Activity: 3
• Identify and explain the basic elements of communication process and give
examples for each.
• What types of feedback do you use when you talk to your friends?
word/verbal lacks the permanence of the written word. However, it is more rapid and
flexible in terms of adjusting to the circumstances. Moreover, the spoken word can be
supported by non-verbal communication such as body language. The non-verbal
communication such as body language will reinforce the spoken message. But,
written communication is formal, permanent and must be kept properly in the
organization.
Activity: 4
• Identify the different nonverbal languages that you use to communicate in your
locality.
• State the advantages of written communication.
Top
Middle
Operational
Activity: 5
• Identify the organization chart of your school and mention the types of
communication in the organization in terms of direction by giving examples.
Activity: 6
Activity: 7
• Go to the secretary or typist of your school and identify the parts of the
letter from any letter sent by your school to any organization such as
Education Bureau.
• Observe one of the letters posted on the notice board of your school. Draw
its structure and identify its common parts?
Which one of these formats to use depends on the ones commonly used in the
organization or the situation in which we are writing. Use the simplified letter if you
lack the name of an individual or department to write to.
The Block format: In the block format, paragraphs are unindented. All letter
elements are flush with the left margin.
Modified block: In this style of letters, paragraphs are unindented. The return
address, reference line, date, complimentary closing, and signature block are right of
centre. The remaining elements are flush with the left margin.
Semi-block: Paragraphs are indented usually an equivalent of five spaces. The return
address, reference line, date, complimentary closing, and signature block are right of
centre. The remaining elements are flush with the left margin.
Simplified: Paragraphs are unindented. The salutation and complimentary closing are
omitted. All elements are flush with the left margin.
The following pictures show what a one-page business letter should look like. There
are three accepted styles. The horizontal lines represent lines of type.
(a)
KIP Publisher
P.O.Box 579
Addis Ababa
Ethiopia
Ref. No ******
January 15, 2002
(e)
Kindly let us have your quotation indicating the price, terms of payment, delivery time
etc.
Activity: 8
Activity: 9
Dear Sirs:
Sincerely,
Mohammed Yimer
Director, Menilik II Preparatory School
2.3.4 Memoranda
Memorandums or memoranda or memos are structured more formally than are notes.
A memo has basically a four-part heading:
Please note that there will be mid-examination on the course General Business
Education on June 20, 2012 at 2:00 p.m. in the school hall.
Activity: 10
1. Cover: The cover is the first encounter with the report and has to be eye-
catching. The cover also serves to enhance the image of the organisation. In case
of reports prepared by students, the cover page and the title page is usually the
same.
2. Title Page: The title should be precise and convey the main objective of the
study or the project. This page could also include subtitles, which gives more
information about the project.
3. Summary: This is the most important part of the report. The summary should
contain the main point of the report. The entire information carried in the report
must be conveyed in its essence.
4. Table of Contents: This section gives the broad contents of the report and the
flow of information in the report. The arrangement of topics and the flow of
information should be logical. The arrangement of topics is logical if ideas
naturally follow each other.
5. Introduction: This section should give the background information on the
report. It should give an explanation as to why the particular study or project is
undertaken. It should also give the prevailing facts at that point of time.
6. Main Body of the Report: This discusses the project in depth. This will include
the steps taken for the research/report, the actual research carried out and the
data collected and used for the study.
7. Conclusion: This section must give the results of the report. This should be very
objective. This section must contain only the conclusions and not the
recommendation as the user might like to decide for him/her based on the
conclusions of the report.
8. Recommendation: This section is to be included if specific recommendations
are asked for. The author/report writer can give out his/her opinion and must
suggest the specific course of action to be taken to act on this report.
9. References and Appendices: These are put up at the end of the report if they
are required.
Activity: 11
Activity: 12
• Organize any short trip with your teacher and prepare trip reports in-group
consisting of three to five members. You can visit any project started at or
nearby or laboratory of your school.
Qualifications: State your qualifications by starting with the most recent such as
course level achieved and when it took place, name of institution.
Work experience: Starting with the most recent/most relevant, first include your job
title, start and finish dates.
Skills: Highlight specific skills, knowledge or attributes starting with most
impressive/most relevant to the particular job application.
Achievements: This is where you can include activities over and above job experience
and study that show constructive use of your spare time. You can include things like
positions held on committees, charity work, public speaking, competitions etc.
Hobbies and Interests: Use this section to show that you have interests outside the
job.
Referees and References. Referees are considered more important these days than
letters of reference, although it is good to have both. Always ask for a reference after
having worked for someone, even if it is only a few days or in a voluntary capacity.
proving why you are the best person for the job. You should use it well to complement
your CV. See Annex B to see for sample cover letter.
Activity: 13
Interview guidelines
• Do not sit until you are offered a chair.
• Smile, be attractive and listen carefully.
• Maintain eye contact when you talk.
• Do not interrupt over the interview.
Activity: 14
Summary
Review Questions
Part I. Choose the best answer from the given alternatives.
1. Which one of the following is not an element in the communication process?
a. Sender c. Noise e. none of the above
b. Receiver d. Feedback
2. The communication between the school director and your business teacher is an
example of
a. Upward communication c. Horizontal communication e. b and c
b. Downward communication d. a and b.
3. The policies, instructions and orders that flow from Woreda Education Bureau to your
school is an example of
a. Upward communication
b. Downward communication
c. Horizontal communication
d. a and b.
e. b and c
4. The suggestions that students and teachers give to the school administration is an
example of
a. Upward communication
b. Downward communication
C. Horizontal communication
d. a and b
e. b and c
5. The description of oneself is
a. Curriculum Vitae
b. Interview
c. News Release
d. Form Letter
e. None
Form group of ten students and write short note whether there exists good or poor
communication b/n teachers and students in the learning and teaching processes in the
school and discus it with the school principal.
Annex A: Sample CV
CURRICULUM VITAE
1. PERSONAL DETAILS
• Name: ************************
• Date of Birth: DD/MM/YYYY
• Sex: *****
• Marital Status: *****
• Nationality: Ethiopian
• Address: P.O.Box *******
Tel *********
E-mail: ********
Addis Ababa, Ethiopia
2. EDUCATION
1998-2000- Diploma in Purchasing and supply Management, Addis Ababa
Commercial College, Addis Ababa
3. WORK EXPERIENCE
2000-2001 Assistant purchaser, ABC Trading, Addis Ababa
2001- present Purchasing Clerk, ABC Trading, Addis Ababa
4. SKILLS
Computer skills in word, Access, Excel, PowerPoint
5. ACHIEVEMENT
I served as observer during kebele election during 2000 election.
7. REFERENCES
• Workie Tolosa, Lecturer, Addis Ababa University, School of Commerce,
tel. **********
• Mohamed Kebede , Lecturer, Addis Ababa University, School of Commerce,
tel. **********
• Bogale Mengistu, Addis Ababa University, School of Commerce,
tel. **********
Sosina Tesfaye
P.O.Box ****
Tel. ********* Off.
Mobile *********
Addis Ababa
E-mail: *************
Dear sir/Madam:
I am writing this letter in response to your advertisement on the ″The Daily Monitor″,
dated 8th February, 2011 for the post of Procurement Officer.
Since my graduation, I have been working as assistant buyer and purchasing clerk in
one of the business organizations in Ethiopia.
I have also good experience in working as data entry personnel in one of business
organizations dealing in export-import business. Recently, I am also working as freelance
writer in one of national newspapers in the areas of purchasing ethics.
Copies of my academic credentials, curriculum vitae and three references are enclosed.
Could you, therefore, consider my application for the position of Procurement Officer? I
would be pleased to appear for an interview or test at your earliest convenience.
Yours faithfully,
Sosina Tesfaye
Enclosure: Copies of my academic credentials, curriculum vitae and three references are
enclosed.
General Business Education Grade 12 67
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1. ________________________ 3. ____________________________
2. _________________________ 4. ____________________________
Remarks
________________________________________________________________
________________________________________________________________
Signed
_______________________
Introduction
The growth of world trade offers tremendous potential for Ethiopian business
organizations that are engaged in buying and selling goods and services in overseas
markets. But success in the international trade requires better quality products,
competitive price and increased productivity. There are different facets to
international trade such as different currencies, trade terms, risks and ways of
financing the deal, etc.
These complexities require imaginative trading strategies that address the challenges
facing companies pursuing business opportunities overseas. Therefore, to undertake
a successful business in the international market, there must be a good
understanding of the required procedures and principles. The purpose of this unit is
to give a brief explanation of foreign trade and its procedures. Additionally, in order to
have a clear picture about foreign trade, there is a need for a brief discussion on
domestic trade particularly transaction related issues.
Business people face the problem of finding a person who is willing and capable of
buying products. This is a major problem of business because producers may not be
in a position to get a person who has the need, interest and the power to buy a
product. On the part of the buyer, the problem is getting the right producers which
do have the necessary product features with regard to quality, quantity, price and
other factors. Ideally, if you want to trade, you must find someone who has what you
want and you must also have what he wants and the two of you agree on values and
then it can be said transfer of exchange has taken place.
Trade is one of the major components of business which is mainly responsible for
distribution and sales, Also traders perform the basic functions of transportation,
facilitating payment, taking risk and providing information for facilitating trade.
Trade solves this basic and fundamental problem of commerce. Thus, the literal
meaning of trade can be stated as follows:
3.1.1 Trade
Trade can be sub-divided, firstly, on the basis of operation. Accordingly, we find
internal trade and international trade. Secondly, the classification can also be based
on the unit of sale. Thus, we find wholesale trade and retail trade which are
explained briefly.
i) Internal Trade: Internal trade, also known as home trade, consists of buying and
selling of goods and services within the boundaries of a country. Payments are
usually made in national currency or through the national banking system. The
internal transportation system is utilized for the movement of goods. Large numbers
of middlemen are not generally involved. Government regulations are not varied and
rigid. Internal trade may be conducted on either of the wholesale or retail bases (see
the explanation of wholesale and retail trade in the marketing unit).
ii) International Trade: International trade, also called foreign trade, refers to the
exchange of goods and services between two or more countries. International
trade may be further sub-divided into import, export and entrepot trade.
a) Import Trade: consists procuring of foreign goods for home consumption.
b) Export Trade: consists in the supply of domestic goods for foreign use.
Ethiopia exports coffee, hides and skins, flowers, oil seeds and pulses to foreign
countries mainly to western nations.
70 General Business Education Grade 12
3 Trade
c) Entrepot Trade: involving the import of foreign goods for re-exporting them to
foreign consumers and making a profit in deal. For instance, United Emirates
is a major re-exporter of many of the products of far eastern and western
countries to the African market including Ethiopia.
1. Banking: Banking provides a means through which payments for purchasing and
selling of goods can be made. It pools resources from individuals in the form of
savings and deposits and make them available to those who can use theses
resources profitably.
2.Transportation: As stated earlier in marketing part of this textbook, transportation
ensures a smooth and uninterrupted flow of goods from producers to wholesalers,
to retailers, to customers.
3. Insurance: It provides a cover against the loss of goods in the process of transit
and storage.
4. Warehousing: As stated earlier, warehousing creates time utility. It maintains
goods in perfect condition until they are required by customers.
5. Advertising: Advertising provides information to customers and other middlemen.
6. Packaging and packing: They protect goods from damage during transportation.
The business transactions need some important documents (papers) or letters. These
papers are very useful for facilitating exchange of goods and services. They are (a)
the enquiry, (b) the quotation, (c) the order, (d) the invoice, and (e) the document of
payment for the goods.
The Enquiry: it is letter sent by the buyer to the seller asking for the price of goods
that he/she thinks of buying. In other words, it is a request for information and
should state types of goods, at what prices goods can be obtained, and terms of
delivery and payment. A letter of enquiry states definitely the requirements, the
approximate quantity, whether the seller should pay certain costs (e.g. carrying i.e.
transportation).
Quotations: It is an offer to sell certain goods at a price under conditions that are
clearly stated. The quotation contains conditions in such points like;
• Subject to acceptance within 7 days of the date of quotation;
• The quantity, quality, price, terms of delivery and payment including sample
of the product;
• The quotation should be numbered and a copy of it is kept on file.
Activity: 1
The Order/Indent: Order is the document sent by the buyer to the seller for the
supply of goods. The order must contain full particulars of the goods required with
terms of delivery and payment. The order may be written as a letter or in printed form
like quotations. The order must clearly state the terms and conditions under which
goods will be acceptable and payment may be effected. However, some sellers will
state their own terms and conditions instead of accepting that of the buyers.
The Invoice (Executing the Order): After the order is received from the buyer, the
seller prepares a document known as an invoice. Every organization is unique and it
has its own procedures depending on its needs and resources.
Invoice
Enquiry
Seller Buyer
Quotation
Purchase Order
Payments
Rights of Traders
The business documents stated earlier are business contracts between buyers and
sellers. However, businesses often give their standard terms and conditions of
business (T&C’s) low priority until a dispute arises. Nine times out of ten it is too late
to do anything about it at this stage. Often T&C’s are out of date, inappropriate,
ambiguous, unlawful, or, (as in many cases), non-existent.
The first thing to note about terms and conditions (T&Cs) is the difference between
business-to-business (B2B) trading relationships and business-to-consumer (B2C)
relationships. In B2B traders have a lot more freedom to agree whatever they want
than with B2C relationship. Irrespective of what the T&C’s say, in B2C relationships
consumer law will override to protect certain consumer rights, and imply certain
others if traders are silent about them. It is for this reason that it is very important to
tailor the T&Cs to the customer base to afford the maximum protection, whilst
making sure that traders don’t overreach. If traders trade in both B2B and B2C
markets, they may even want to have a different set for each. To protect themselves
from possible problems, traders should consider at least two issues: timing and
Proper Notice.
Timing: Classic bad example is T&Cs on the back of the invoice. As invoices are
characteristically delivered after the contract has been made, the terms are generally
unenforceable. Ensure your T&Cs are brought to your customer’s attention at the
earliest opportunity. Consider setting out your terms in your brochures, catalogues
or other marketing material, and certainly on your order/quotation forms and
acknowledgement of order (if applicable).
You must be able to demonstrate that you have done enough to draw the consumer’s
attention to the T and Cs. Accordingly, a consumer should be required to
acknowledge that he or she has read and agrees to the terms as part of the
purchasing process. However, laws to protect consumers’ rights are rarely enforced in
developing countries because of weak capacity in law enforcement and non-existence
of organized groups to protect the rights of consumers by taking the issues to the
court.
Capabilities of a Trader
Consider any successful businessman. Often in the beginning, success came by
simply working harder, putting in more hours, taking on more personally. Doing
what ever it takes. But, this may not lead the trader to permanent success.
Compare a professional athlete with a trader. For a professional athlete, losing is not
an option. Unfortunately, in trading, losing is mandatory. Losing the right way is
what matters, proper amount on appropriate trades. Once a trade has stopped, it is a
loss and the trader moves on. The trader knows that what matters is process that
delivers winners over a period of times. What is significant is not what happens on
one trade. To the athlete, losing is not acceptable. It must be avoided at all costs at
all levels.
So what is helpful for a trader? Learning the whole process of trading is most
important. Learning from those who have been through (beginning to an end) it, or
having the ability to learn and adapt quickly as traders go. Having the mindset of
having a plan, being able to adjust that plan in the proper way at the proper time,
and carrying out the plan until the results are reached. Then, constantly evaluating
the process, eliminating mistakes and being mindful of the need to change and be
flexible.
Unfortunately, it may be difficult to get traders with such extraordinary qualities with
businessmen in developing countries like ours given our tradition. But, we expect
such people to emerge in the future.
Activity: 2
One country may have an absolute advantage with regard to several products,
whereas another country may have no absolute advantage at all. Yet, it is still
worthwhile for these two countries to specialize and trade with each other.
To see why this is so, imagine you are the president of a successful manufacturing
firm, and you can accurately type ninety words per minute. Your assistant can type
eighty words per minute but would run the business poorly. You, thus, have an
absolute advantage over your assistant in both typing and managing. But you cannot
afford to type your own letters because your time is better spent in managing the
business. That is, you have a comparative advantage in managing. A comparative
advantage is the ability of a nation to produce a specific product more
efficiently than any other product.
Your assistant, on the other hand, has a comparative advantage in typing because he
or she can do that better than managing the business. So you spend your time
managing, and you leave the typing to your assistant. Overall, the business is run as
General Business Education Grade 12 75
3 Trade
efficiently as possible, because you are each working in accordance with your own
comparative advantage.
The same is true for nations. Goods and services are produced more efficiently when
each country specializes in the products for which it has a comparative advantage.
Moreover, by definition, every country has a comparative advantage in some
products. However, countries want to produce each and every product for self-
sufficiency strategies and needs. As a result, they restrict importation of many items
to their markets and at the same time they encourage export of their products to
other countries to generate hard currency. For example, Ethiopia levies no export
customs duty except on coffee. But there is import customs duty almost on all
products to be imported to Ethiopia.
Activity 3
• Explain the concepts of absolute and comparative advantages and give
examples for your explanation.
b) Specific: This shows that tax is levied on the quantity of the goods imported
or exported such as 100 Birr per ton for some type of goods.
2) Additional taxes and non-tariff barriers. There are also some additional taxes
other than the usual customs duties that are discussed below briefly.
a) Customs Surcharge: This is an additional duty of so much percent on all
customs duties. It enables the government to raise the charges without
changing the ordinary rates as changing the ordinary rates frequently is
expensive. It is certain percentage of the customs duty. When the government
faces financial problems in certain extraordinary problems like war, it levies
customs surcharge to increase its revenue to finance the problem.
b. Other Taxes: Barriers can be tax or non-tax barriers. These are taxes levied
by the local authorities, such as port authorities or municipalities on all
imports and exports that are stated as certain percentages of customs duties.
c. Non-tariff barriers: A non-tariff barrier is non-tax measure imposed by a
government to favour domestic over foreign suppliers. Non-tariff barriers
create obstacles to the marketing of foreign goods in a country and increase
costs for exporters. The following are a few examples of government-imposed
non-tariff barriers:
• An import quota is a limit on the amount of a particular good that may be
imported into a country during a given period of time. The limit may be set in
terms of either quantity or value of the goods. This system has been very
common during the previous government for certain items such as automobiles.
• An embargo is a complete halt to trading with a particular nation or in a
particular product. The embargo is used most often as a political weapon rather
than economic reasons.
• A foreign-exchange control is a restriction on the amount of a particular
foreign currency that can be purchased or sold. By limiting the amount of
foreign currency importers can obtain, a government limits the amount of goods
importers can purchase with that currency. This has the effect of limiting
imports from the country whose foreign exchange is being controlled.
• A nation can increase or decrease the value of its money relative to the currency
of other nations. Currency devaluation is the reduction of the value of a
nation's currency relative to the currencies of other countries. Devaluation
increases the cost of foreign goods, while it decreases the cost of domestic goods
to foreign firms. Ethiopia has reduced the value of Birr from Birr2.07 in 1991 to
Birr 5 around 2000 and now (2010) the value of $1 is between Birr 13 and
Birr 14 as of revising this material it is between Birr 20 and Birr 21..
• Bureaucratic red tape (excessive procedure) is subtler than the other forms of
non-tariff barriers. Due to the excessive procedures designed for controlling
purposes, bureaucratic procedures can frustrate many importers and exporters.
Activity: 4
Activity: 5
important skill in a foreign country is language that the native can speak it
fluently at the age of three.
3. The need for financial resources because of the long interval between the time
when the goods are dispatched from one country and received by the importer
in another country.
4. Because of the long distance between the country supplying the goods and the
country receiving them, goods are exposed to greater risks.
5. The existences of trade barriers such as tariff and import restrictions which are
other important factors in foreign trade. Trade barriers are discussed in the
ensuing topics of this unit. Because of the reasons mentioned above and other
reasons stated below, foreign trade requires documents.
Activity: 6
This document may be issued in two forms: the Straight Bill of Lading and the
Order Bill of Lading. The straight Bill of Lading is a bill that provides for
delivery only to the party named in the Bill of Lading and to no one else. In this
case, the carrier or his agent must be certain that the party receiving the goods
is actually the party named in the bill. On the other hand, the Order Bill of
Lading is a negotiable instrument which provides for delivery to a named party
or his order (anyone he may designate) by endorsement of the Bill of Lading.
Goods transported under negotiable Bill of Lading are not to be released by the
transport company until the bills of lading have been surrendered bearing the
endorsement of the party claiming the goods.
b) Special Types of Bill of Lading. Different types of Bill of Lading are also
common such as ocean bill of lading, inland bill of lading, airway bill and
postal parcel receipt that are discussed below:
Ocean Bill of Lading: This is a document that covers the movement of goods by sea
and may be issued in either straight or order form. Steamship companies issue such
bills of lading in sets consisting of one or more originals and bearing a clause that
says that the cargo will be released upon presentation of one of the originals, thus,
making valueless the remaining originals of the complete set. It has been the most
common practice to issue ocean bills in sets of three originals. However, there is a
trend in international trade to issue one or more original bills of lading. See Annex A
in this unit for Bill of Lading document.
Inland Bills of Lading: These are issued by railroad lines or truck lines and can also
be drawn in either straight or order form. Unlike ocean carriers, the inland carrier
never issues more than one originals of such bills.
Airway Bill: is a receipt for goods carried by air and often referred to as an “Air
consignment Note”. Airway bill is generally issued by air carriers for merchandise to
be delivered to a party at some named destination. See the sample Airway Bill in
Annex B at the end of this unit.
Parcel Post Receipts: which are issued by the postal service and are non-negotiable
and merchandise is deliverable to the addressee only. It is a post office receipt for
goods dispatched by mail. The receipt is evidence of dispatch only.
iii) Insurance policy Certificate: The exporter arranges for the insurance of the
goods against the usual perils of the sea. He gets the insurance policy against
payment of premium, which is usually, a percentage of the insured value (10% to
20% above the invoice value covering the probable duty payable or the imports
and other incidental expenses involved).
The terms of contract between the importer and the exporter should define the
responsibilities for arranging insurance coverage whilst the goods are in transit
and what risks are to be covered. See Annex C for sample Insurance Certificate.
iv) Certificate of Origin: This is a document which states the country (countries) of
origin of goods. It enables the importer to get advantage of special treatment. Due
to special trade agreements between countries, goods sent from friendly country
to another generally receive preferential treatment in import duties. For example,
European Union provides customs duty exemptions to Ethiopian commodities.
The supplier should complete it and may have to be authenticated by a chamber
of commerce or other authorized body in the exporter’s country. The certificate
should include the name and address of the exporter, the manufacturer ( if
different ), the importer, a description of the goods and the signature and the seal
of the authorising organization.
v) Consular Invoice: It is a document of verification of customs duties given by the
trade consul of the importing country residing in the exporting country. The
consular invoice along with other documents will be sent by the exporter to the
importer. The purpose of the document is to facilitate the calculation of the custom
duties by the authorities of the importing country without taking more time.
vi) Certificate of Health: Agricultural and animal products may require a certificate
stating that they comply to the importing country’s health regulations. This
certificate must be authorized and signed by the health authority in the exporter’s
country.
Vii) Pack List: Where there are several packages in one consignment, an invoice is
usually accompanied by a packing list which details the contents of the package
and may also show their weights and measurements.
Activity: 7
• Identify the different documents used in foreign trade and explain the
purpose of each one.
The quotations also include the price and terms of sale. In case of first enquiry, it is
usual to make some investigation regarding the financial position of the client. It can
be done by means of a banker's reference if the bank's name is supplied by the
enquirer or by means of a trade reference or inquiry with some firm(s) who had
business dealing with the potential supplier. The documents should also specify the
terms of shipment and payment.
Activity: 8
1. Letter of Credit: The letter of Credit typically is issued by the importer's bank,
that is, the issuing bank. The issuing bank's L/C signifies that the bank agrees to
pay the importer's obligation to an exporter resulting from a sales agreement;
contingent on receiving documentation proving that shipment was made. In
return for the L/C, the importer warranties that he or she will pay the bank the
sales amount and any fees.
The L/C is crucial to exporters if a foreign customer is not well known or if the
customer's credit is suspect for any reason. The L/C substitutes the issuing bank's
credit and reputation for those of the importer.
The issuing bank sends the L/C covering the amount of the sale to the exporter's
bank (called the paying bank) in the exporter's country. The paying bank, in turn,
sends the L/C to the exporter. When shipment is made, the exporter presents its
sight or time draft along with proof- of-shipment documents to its (paying) bank. The
exporter's bank then pays the seller, debits the account of the importer's bank, and
sends the shipping documents and the draft on to the importer's bank. Upon receipt
of the documents and draft; alternatively, with a time draft, the importer's account is
debited on maturity) and conveys the documents, representing title to the goods to
the importer. The following diagram shows the above description in schematic model.
4.
Seller & buyer co nclude sales
documentary credit.
8. 2. Buyer asks issuing bank
to provide documentary
Seller & buyer co nclude sales
contract with payment arran ged
by docu mentary credit,,,b, vb,vb,
documentary credit.
14. Bbbbbbbbb
15. bbbbbbbbb
bbbbbbb
4. Advising/confirming bank
1.
Seller & buyer co nclude sales
contract with payment arran ged
to seller
2. Bbbbbbbbb
3. bbbbbbbbb
bbbbbbb
20
R
20
confirming bank or
10 10 10
nd 15 15 15
Cos 10 5 3
vice 30 25 20
War 15 15 10
ran
ty
8. Documents forwarded to
issuing bank
Subject:
documents to buyer
ia e
20 20 20
10 10 10
nd 15 15 15
Cos 10 5 3
vice 30 25 20
War 15 15 10
The Letter of Credit must specify the value of the credit, the time limit for submitting
documents, (which in turn limits the time for shipment), mode of dispatch, i.e., by
road, rail, sea, air or parcel post: whether partial shipment are allowed, etc.
2. Advance payment (cash in advance): In this method, the buyer makes advance
payment. This method often is used when the buyer is unknown to the seller. The
method places the financing burden entirely on the buyer; once the buyer has
made the cash payment, he/she has no assurance that the seller will fulfil his
obligations.
3. Open account: Instead of either receiving funds prior to shipment (cash in
advance or at the time of shipment (irrevocable letter of credit), the exporter may
be requested to ship on open account terms.
• The exporter who agrees under this method of payment will ship the goods
without receiving of a bank assurance of payment, but will get paid under the
usual payment terms of the buyer usually not more than 180 days following the
invoice date.
• Payment on open account offers the least security to an exporter.
• Time Draft Collection: Using this method, the seller draws a draft on the buyer
payable on a specified due date or a certain number of days after sight or after bill
of exchange date. The time draft and documents are forwarded through the seller's
bank to the buyer's bank overseas with instructions to deliver documents against
acceptance only. A time draft exposes the exporter to more risk than a sight draft
because the buyer is in possession of the merchandise, without paying, from the
date of acceptance. The seller must be certain that the buyer is capable of paying
on the maturity date and that the political and economic conditions of the country
are stable enough to ensure that payment will be made without significant delay.
To accept the draft, the buyer signs across the face of the draft and indicates the
date accepted.
• Clean Draft Collection: Under this payment method, the seller presents only
his/her draft to the bank for collection; the shipping and other documents are
sent directly to the buyer. This method lacks the protection of a documentary
collection.
5. Consignment Sales: The goods may be shipped "on consignment" whereby the
buyer receives the goods but makes payment to the seller only if and as the goods
are sold by the buyer. However, ownership (title) of any unsold goods remains with
the shipper.
In the foreign terms of payment, there are more risks for the seller of goods than for
the buyer.
Some of the main risks in international trade are:
1. Country Risk: depends on the political, economic, legal and social stability of the
country that are engaged in trade.
2. Importer Risk: The common risks are; non-payment of invoices, delayed payment
of invoices and insolvency of buyer.
3. Industry risk: include demands of particular products, recession in particular
industry, competitive products/pricing.
4. Foreign exchange: risk includes fluctuation in exchange rates affect pricing and
profit.
5. Exporter Risk: Problems in producing correct documentation, failure to supply
goods in accordance with the sales contract.
6. Transportation risks: are risk associated with the mode of transport, e.g. Marine
risks, storage facilities in ports.
Many of these risks can be insured against or mitigated through the payment
mechanism. However, reducing your own risks may result in your counter
parties having to accept a greater degree of risk and may increase costs of both
parties which had an impact upon competitiveness.
Activity: 9
• Identify and briefly explain the five methods of payment in foreign trade.
• Explain the role of banks in foreign trade.
General Business Education Grade 12 89
3 Trade
For the purpose of customs estimation, Customs Authority uses the concept of entry
regime. According to the entry regime, goods are classified as (1) dutiable goods that
requires dutiable import declarations for payment of customs duty, (2) Duty free
import declarations for diplomats, students returning from their study leaves abroad,
International Organizations in which Ethiopia is a member, etc. and in such cases
there is no payment of customs duty; (3) Duty Relief Import Declarations that include
Investment Import Declarations, Government Import Declarations, NGOs, Temporary
imports such as for exhibitions and foreigners working in major projects in Ethiopia.
Government offices may not pay customs duty but the Ministry of Finance may
deduct the equivalent amount from their annual budgets. Group (4) is the duty
drawback category. If an importer imports certain goods to further process and
export the finished goods, the customs authority refunds the customs duty paid
earlier for the semi-finished goods/raw materials/finished components imported. But
this fact must be communicated to the Ethiopian Customs Authority.
Activity: 10
Summary
The bases for foreign trade are the traditional theories of Economics,
namely absolute and comparative advantages. Foreign trade is
undertaken always on the wholesale basis and it requires the involvement
of many parties. Because of political, distance, legal, customs, language
and other features, foreign trade requires special procedure to be
followed. Foreign inquiries and quotations must contain full details and
particulars of goods such as descriptions, catalogue number, size, weight
and other distinguishing features and the quantity, the time and method
of delivery, packing and packing size, the firm period of price and other
details.
The common terms of payment in the foreign trade are letter of credit,
cash in advance, open account, bills of collection and consignment. They
do have different degrees of risk for the exporter and importer. There are
also different ways of entering into the international trade ranging from
licensing to multinational firms.
Review Questions
Part I. Choose the best answer from the given alternatives.
1. The highest risk for the exporter is in
a. Letter of credit c. Advance payment
b. Bill of exchange d. Consignment sales
2. If Somalia exports Ethiopian coffee to the international trade such business is
known as
a. Wholesale trade c. Export trade e. Entrepot trade
b. Retail trade d. Import trade
3. The payment terms that forces the buyer to bear the maximum responsibility is
a. DDU b. DES c. DAF d. EXW e. FOB
4. Which one of the following is not part of trade?
a. Banking c. Advertising e. Transportation
b. Insurance d. Inland trade
5. The most secure for the importer of a foreign trade is
a. Letter of credit c. Consignment sales e. None
b. Open account d. Bill of exchange
PART IV. Group Work Form group of five students and write the history of trade in
Ethiopia by referring different sources and present it to the class.
Annex B: Domestic Bill of Exchange (Foreign is also the same except some units
such as $)
A bill contains:
a) The name of the form -Bill of Exchange
b) Date -10 Oct. 2001
c) The Receiver - International Buyers Limited
d) The signer - Sosina Tesfaye
e) The address of the receiver - Dembel City Center, Addis Ababa
f) Terms of the date - 60 Days
g) The amount - One Hundred Twenty Five Thousand Birr
Introduction
The primary purpose of this unit is to explore the nature of accounting information
and the environment in which it is developed and used. The unit emphasizes the fi-
nancial reporting process, including the role played by financial statements. The ba-
sic financial statements-, Income Statement, Capital Statement and Balance Sheet
will be discussed, as well.
Personal record keeping often uses a simple single-entry system, in which amounts
are usually recorded in column form. Such entries include the date of the transac-
tion, its nature, and the amount of money involved. Record keeping of organizations,
however, is based on a double-entry system, whereby each transaction is recorded on
the basis of its dual impact on the organization’s financial position or operating re-
sults or both.
many different types of economic decisions, there are many types of accounting in-
formation.
General Business Education Grade 12 99
4 BUSINESS RECORDS KEEPING AND FINANCIAL REPORTS
the accumulation, processing and reporting of financial data to various users. Ac-
countants specializing in this area will apply different components of information
technology in well designed information system to collect and process financial da-
ta into useful information, to provide timely and accurate financial information for
decision makers and to safeguard company properties including its data.
g. Fund Accounting: also called not for profit accounting, fund accounting is an
area of accounting that specializes in recording, reporting and planning the opera-
tions of nonprofit, governmental and most nongovernmental entities such as hos-
pitals, schools, etc. It will help management to adhere to restrictions and other re-
quirements imposed by law, other institutions or individual donor groups.
h. International Accounting: is concerned with the special problems associated
with the international trade of multinational business organizations. This area of
accounting has increased in importance because of increase in the number of in-
ternational companies in response to globalization and expansion of international
trade. Accountants specializing in this area shall have familiarity about the influ-
ences that custom, law, and taxation of various countries will place on interna-
tional operations and accounting principles.
i. Accounting Instruction: this is an area of accounting that involves the teaching
of accounting at various levels. It involves research, publications and related activ-
ities that are intended to integrate accounting theory with accounting practice.
Certain accounting concepts and principles govern the accounting practices.
100 General Business Education Grade 12
4 BUSINESS RECORDS KEEPING AND FINANCIAL REPORTS
Activity: 1
4.3.1 Assets
All of the valuable resources that a business has gathered together for its use or what
businesses or individuals own are called Asset. Assets are of two types: current As-
sets and Fixed Assets. Assets used to support the day-to – day operations of a com-
pany are Current Assets or Working Capital. These assets normally can be con-
verted into cash, sold or used within a short time, usually a year or less. Cash and
other assets that will be turned into cash or quickly consumed in the operation of a
business are called current assets. Current assets include such things as cash, Ac-
counts receivables, inventory and supplies. Accounts receivables are the amounts
owed to the company for goods or service provided to customers but money not yet
received. They are current assets because they represent the cash expected in a
short time. Inventories are goods held on hand for production process or for sale to
final consumers. Supplies are items such as stationeries, which can be consumed
within a year or less. Fixed Assets are relatively permanent goods or resources
owned by a company. Most companies do not expect to turn out their fixed assets in-
to cash on a regular basis. Examples include factories, office buildings, durable
equipment and other long lasting facilities of a business. The fixed assets of a com-
pany provide the long-term setting in which operations take place. In sum what is
owned and has got value (sales value or use value) is referred to as asset. Note that,
for example, a table no more useful at home and cannot command price in the mar-
ket is not an asset in that it does not have value.
102 General Business Education Grade 12
4 BUSINESS RECORDS KEEPING AND FINANCIAL REPORTS
4.3.2 Liabilities
The sums the company owes to other businesses or individuals are called liabilities.
Liabilities consist of the claims of its creditors against its assets. Debts that are owed
and payable within a short time are classified as current liabilities. Amounts owed
to trade creditors- such as purchases of merchandise on account with in short period
of time is classified as current liabilities. For example, if merchandise is purchased
on account to be paid within 30 or 40 days, the liability is a current liability. All lia-
bilities that will come due and be payable within one year should be treated as cur-
rent liabilities.
Debts that will not be due for several years are called long term liabilities. Examples
of long-term liabilities are money borrowed from bank, which will be paid over long
period of time such as 5 years or more.
4.3.3 Capital
The amount that remains after total liabilities are subtracted from the total assets is
called capital .Sometimes it is also known as proprietorship.
For example:
Total assets of Ato Teshome Tesfaye Company……………Birr 72.000.00
Less total Liabilities (amount owed from bank and persons) 2.000.00
Equals the amount of the owner’s (Ato Teshome’s) capital……. 70.000.00
Activity: 2
Activity: 3
If total assets are three times (thrice) the total liabilities and total capital is
Birr 400,000 calculate the total liabilities and total assets.
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Record the totals directly under the addition line on each side. Do not
skip a space.
Write the words Total Assets on the same line as the left-hand total.
Write the words Total Liabilities and Capital on the same line as the
right-hand total. If necessary, the words on this line may be abbreviated
to Total Liab. and Cap.
Rule double line across both amount columns directly under each total.
The double lines show that the work is completed and that the balance
sheet is “in balance.”
Assets Liabilities
Cash 650.00 Ato Teshome Tesfaye Co.
Commercial Bank 150.00
Operating Supplies 250.00 of Ethiopia
850.00
Activity: 4
i. Find the missing amount in the bookkeeping equation for each of the items
listed below.
Item Assets = Liabilities + Capital Answers
a. Birr 10,000 = Birr 4,000 + ? ________
b. 6,000 = ? + 4,500 ________
c. ? = 23,000 + 4000 ________
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ii. The following are the assets and liabilities of M. Dry Cleaners owned by
Ato Kebede Gemechu.
Assets Liabilities
Cash Birr 844.00 W/o Ayelech G/Selassie Co. Birr 110.00
Delivery Equipment 2,266.00 W/o Bizunesh Tilahun Co. 785.00
Office Equipment 480.00
Dry Cleaning Equipment 1660.00
Instruction: Prepare a balance sheet for M. Dry Cleaners. Use the date Septem-
ber 1 of the current year.
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Step 2: Debit part of the entry: Write the debit part of the entry as shown below:
a. Write the name of each asset at the extreme left edge of the Account
Title column
b. Write the amount of each asset in the Debit column.
Step 3: Credit part of the entry: Write the credit part of the entry as shown below:
a. Write the name of each liability and the name of the proprietor, fol-
lowed by the word Capital, in the Account Title Column. Indent each
name about one-half inch from the left edge of the Account Title col-
umn. Indenting these items helps to separate the debit part of the en-
try from the credit part.
b. Write the amount of each item in the Credit column
Step 4: Source of the entry: Write a brief description of the source document as
shown below.
a. Write a brief description of the source document in the Account Title
column immediately below the last credit column.
b. Indent each line of the description about one inch from the left edge of
the Account Title column.
The purpose of the description is to identify the source of the journal entry in case
reference must be made to the source document.
Activity: 5
Africa Garage is owned and operated by W/o Degitu Tollesa.The record shows the
following assets:
Cash …………………………… birr 567.00
Supplies ………………………. 300.00
Garage Equipment …………… 3,861.00
Office Equipment …………… 740.00
The Garage owes Belay Company Birr 641.00 and Dagnachew Sapre parts Birr
217.00. The amount of W/o Degitu Tollessa’s capital is Birr 4,610.00.
Use September 1 of the current year as the date.
Instructions:
a. Prepare a balance sheet for W/o Degitu Tollessa Garage.
b. Record the opening entry on page 1 of a General Journal.
As a business carries on its day-to-day operations, changes occur in the value of its
assets, liabilities and proprietorship. Goods and services are bought and sold. Cash is
received and paid out. Debts are owed and paid. When the business makes a profit,
the amount of the proprietorship increases. When the business incurs a loss, the
amount of the proprietorship decreases. An accounting form that is used to sort and
summarize the changes caused by business operations is called an account. A group
of all accounts is called a ledger.
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The standard form of account is divided into a left half and a right half. Each half of
an account is ruled alike. The left-hand side of an account is called the debit side.
The right hand side of an account is called the credit side.
The amount column on the left-hand side has the heading Debit. The amount column
on the right-hand side has the heading Credit. The headings of all the other columns
are the same on each side of an account.
When amounts are recorded in the Debit column of an account, the account is said
to be debited. When amounts are recorded in the Credit column of an account, the
account is said to be credited.
Office Furniture 14
The first digit of each account number tells in which division of the ledger the ac-
count is placed. In the partial chart of account given above, all asset account num-
bers begin with 1; all liability account numbers begin with 2; the capital account
numbers begin with 3. The second digit of each account number tells the position of
the account within its division of the ledger. For example, the account number for of-
fice furniture is 14. This number shows that the office equipment account is in the
first division of the ledger, the asset division, and that it is the fourth account in that
division.
Step 2 Step1
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Step 1: Write the amount of the cash debit, 650, in the Debit column of the
cash account in the ledger as shown above.
In manual bookkeeping, the amount is written first because it is the most
important part of the entry.
Step 2: Write the date of the journal entry, 2010, December 1, in the Date col-
umn of the ledger account as follows:
a) Write the year, 2010 at below of the Date column line.
b) Write the month, December, in the first column under the heading Date on the
same line as follows.
The year and the name of the month are written only once on the side of the
account that is used.
c) Write the day of the month, 1 in the column immediately after the name of the
month.
Step 3: Write the word Balance in the Items column of the account.
Bookkeepers distinguish between the beginning amount in an account and the
amounts recorded later as a result of normal business operations. The beginning
amount or balance in the cash account is therefore labeled with the single word Bal-
ance in the Items column.
Step 4: Write J1 in the post. Ref. Column of the cash account. J1 is written in
the post. Ref. column of the account to show that this debit to cash came
from page 1 of the general journal. J is the abbreviation for general journal.
Post. Ref. is the abbreviation for posting Reference.
Step 5: Return to the journal and write in the post Ref. column of the journal
the account number of the account, 11 to which the item was posted.
Writing the number 11 in the post Ref. column of the general journal shows that this
item was posted to account number 11 and that all the details of the posting of this
line have been completed. For this reason, the post. Ref. figure in the journal is writ-
ten as the last step in posting. When the bookkeepers are interrupted in posting, the
proper use of post. Ref. number enables them to resume their posting quickly at the
right place.
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Step 2
Account Title: Ato Teshome Tesfaye Company Account No.21
Date Item Post Debit Date Items Post Credit
Ref. Ref.
2010
Dec 1 Balance J1 150.00
Step 4
Step 3
Activity: 6
Instructions:
i. Record the opening entry for Dachassa plumbing and Heating on page 1 of a
general journal. Use July 1 of the current year as the date.
ii. Open accounts in a ledger for all the account titles listed on the balance sheet.
Number the accounts as follows: Asset accounts, 11 to 15; liability accounts 21
and 22 and the proprietor’s capital account, 31.
iii. Post the opening entry.
How do business owners know that they are generating profit or incur-
ring loss during their business operations?
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All businesses have operating costs. For example, a business pays for electricity,
rent, telephone service and other costs. Operating costs decrease proprietorship. A
decrease in proprietorship that results from the operation of the business is called an
expense.
tricity and advertising. All increase in expense accounts are recorded on the debit
side because they had a negative impact on the activity of the business.
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Activity: 7
The length of time for which an analysis of business operations is made is called a
fiscal period. The fiscal period may be any length of time desired such as four weeks,
or (a month), three months, six months or one year.
The six amount columns of the work sheet are composed of pairs of Debit and Credit
columns under the major sections headings of Trial Balance, Income statement and
Balance sheet.
The proof of the equality of the debits and the credits in the ledger is called a trial
balance. A trial balance is taken to prove the accuracy of the ledger. In the income
statement section, the amount of each expense is listed in the debit column and the
amount of each income, in the credit column. When the income is larger than the ex-
penses, the amount of the difference is called net income. When the expenses are
larger than the income, the difference is called net loss.
The balance sheet section shows the amount of each asset in the Debit column, and
the amount of each liability and the amount of the proprietorship in the credit col-
umn.
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Step 6: Total the Income Statement columns and the Balance sheet columns.
a) Rule a single line across the Income statement columns and the Balance
sheet columns to indicate addition.
b) Add each column and write the totals on the same line as the Trial Bal-
ance totals.
Step 7: Calculate and record the net income (or the net loss).
a) subtract the smaller total in the Income Statement columns from the lager
total, as follows:
If the total of Income Statement credit column (income) is greater than the
total of Income Statement Debit Column (expenses) the difference is net
income. If total of Income statement Debit Column (expenses) is greater
than total of Income Statement credit column (income) the difference is
Net Loss.
Step 8: Extend the net income (net loss) into the Balance sheet column.
a) Extend the amount of the net income, into the Balance Sheet Credit col-
umn to show the increase in proprietorship as a result of the net income
earned by the business during the time.
b) If there is a net loss for the month, the proprietorship is decreased. The
amount of a net loss is therefore extended into the Balance Sheet Debit
column because this is the column in which deductions in proprietorship
must be shown.
Step 9: Rule double lines below the final totals of the Income Statement columns and
the Balance sheet columns. The double lines show that all work has been
completed and is assumed to be correct.
Activity: 8
The account balances in the ledger of XYZ Company, on November 30 of the
Current year, the end of a fiscal period of one month, are:
Cash…………. Birr 1,444.80 Ato Belay Tilahun, Capital ………… Birr 8,638.85
Automobile……… 2,800.00 Sales ……………………………… 1,501.00
Equipment …….. 4,110.00 Insurance Expense …………………. 30.00
Office Furniture …… 987.10 Miscellaneous ……………………... 34.80
Office Machines …. 714.10 Rent Exzpense …………………… … 10.00
Arega Company ….. 40.00 Salary Expense …………………….. 275.00
Tsehay Company …. 349.25 Utilities Expense …………………… 18.80
Dereje Company ….. 95.50
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expenses. General expenses are costs connected with the general operation of the
business. Office salaries such as salary paid for a secretary, rent, taxes and office
supplies are examples of general or administrative expenses.
The information for preparing the expense section of the income statement is ob-
tained directly from the Income Statement Debit column of the work sheet.
Activity: 9
Activity: 10
about one-half inch. Since Haregewoin Aboye Beauty Salon receives revenue
from sales only, the amount of the sales is also the total revenue. The amount
of sales is therefore written in the second amount column which is used for to-
tals.
Activity: 11
Using the following information, prepare an income statement:
Sales 20,000.00
Expenses:
Advertising Expenses 5,000.00
Fuel Expenses 3,000.00
Miscellaneous Expense 4,000.00
Rent Expenses 2,000.00
Utilities Expenses 850.00
Additional Information:
The Name of the Enterprise: Balcha Duferra Clinic
The Date: For the Month Ended October 31, 2010
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Write the amount of the net income, in the first amount column.
Step 5
Write the words Net Income for December 2010 at the extreme left of the
wide column
Step 6
Write the words less withdrawal for December 2001 in the wide column,
Indented about a half inch.
Write the amount of the withdrawals in the first amount column.
Step 7
Subtract the amount of the withdrawals from the amount of the net income.
Write the net increase or decrease at the extreme left of the wide column. If
the net income exceeds the withdrawals the amount it is called net increase in
capital. If the Withdrawals exceeded the net income the amount is called net
decrease in capital.
Step 8
Add the net increase or subtract the net decrease to /from the total and
write the sum in the second amount column.
Write Haregewoin Aboye capital, December 31, 2010 at the extreme left of
the wide column to identify the amount.
Rule double lines across both amount columns
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Activity: 12
Using the following information, prepare the capital statement for the month
ended September 31, 2010.
Haimanot Olango capital, September 1, 2010 Birr 15,000
Additional capital 2,000
Net Loss 3,000
Withdrawals 1,000
Additional Information
The name of the Business: Haimanot Olango Repair Service
Do you think that business owners should record every small payments in
their respective accounts? What will be the problems if they do so?
Example: On June 5, 2011 LM Co established petty cash fund of Br 520 and placed
it in the custody of the main secretary. The entry to record the establish-
ment is:
2011 Petty Cash............520
June 5 Cash in bank.........520
To establish petty cash fund.
If the company uses the voucher system, the establishment of the petty cash fund
will be done in two steps:
Petty Cash...............520
Voucher payable... 520
The cash withdrawal from the bank is recorded as follows:
Voucher Payable... 520
Cash in bank ............ 520
When payments are made from the fund, no journal entry is made except memoran-
dum information. The petty cash cashier inserts a voucher or petty cash receipt in
the fund. When the fund reaches a certain minimum balance, it is replenished by a
cash withdrawal from the bank account. The entry to record the replenishment of
the fund debits various expenses indicated in the voucher and credits the cash in
bank account.
Example: Assume the petty cash fund of LM Co shows the following composition on
June 15, 1991:
Urgent supplies…………….Br 150
Miscellaneous expenses…. 110
Urgent merchandise………. 220
Amount of cash in the fund is determined to be Br 22.5
The entry to replenish the fund is:
Supplies expenses 150
Miscellaneous expenses 110
Purchase 220
Cash in Bank 477.5
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Summary
The income statement shows the financial progress of a business over a pe-
riod of time. The balance sheet shows the financial condition of a business on
a specific date. A financial report that summarizes the changes in the proprie-
tor’s capital that have occurred during the fiscal period is called capital state-
ment. On the other hand, income statement reports the financial results of a
period of operations.
Review Questions
Part I. Choose the best answer from the given alternatives.
1. One of the following is not the purpose of accounting
a. Providing information for decision makers
b. Summarizing financial affairs of a company
c. Providing bulk data of day to day records of a company
d. Invaluable input for business development
e. None of the above
2. Identify the wrong statement from the following
a. Accounting and bookkeeping are one and the same
b. Bookkeeping is the recording phase of accounting
c. The accountant often supervises the bookkeeper
d. Accounting goes beyond reporting financial information by providing compari-
sons and other analysis
e. None of the above
3. One of the following is internal user of a company
a. The owners
b. The creditors
c. Employees and their trade unions
d. The production manager
e. None of the above
4. One of the following didn’t contribute to the development of accounting interna-
tionally
a. Industrial revolution
b. Corporate organizations
c. Income tax laws
d. Government influence of business affairs
e. None of the above
5. The organization that converts raw materials into finished goods is
a. A merchandising business
b. A manufacturing business
c. A service giving business
d. Organized only as a corporation
e. None of the above
6. A statement that reports the operating results of a company is a/an
a. Balance sheet d. Cash flow statement
b. Income statement e. None of the above
c. Owner’s equity statement
7. An accounting principle that states that affairs of a business organization shall be
kept separate from the affairs of the owner or those of other business organiza-
tions is
a. Going concern concept d. Periodicity principle
b. Cost principle e. Monetary principle
c. Business entity concept
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IV. Project
A. Hill owns and operates a service giving business enterprise, Hill Photographic
Studio. The chart of accounts is given below.
(3) Capital
A. Hill, Capital 31
A. Hill, Drawing 32
The following business transactions were completed during the month of March, 2011.
March 1. The owner invested the following assets in the enterprise: Cash, Birr3,500; Ac-
counts Receivable, Birr950; Supplies, Birr1,200; and Photographic Equipment,
Birr 15,000. There were no liabilities transferred to the business.
1. Paid Birr2,400 on a lease rental contract, the payment representing three
months’ rent of quarters for the studio.
4. Purchased additional photographic equipment on account from Palmer Photo-
graphic Equipment Inc. for Birr2,500.
5. Received Birr850 from customers in payment of their accounts.
6. Paid Birr125 for newspaper advertisement.
10. Paid Birr500 to Palmer Photographic Equipment Inc. To apply on the Birr2,500
debt owed them.
13. Paid receptionist Birr575 for two weeks’ salary.
16. Received Birr1,980 from sales from the first half of March.
20. Paid Birr650 for supplies.
27. Paid receptionist Birr575 for two weeks’ salary.
31. Paid Birr69 for telephone bill for the month.
31. Paid Birr175 for electric bill for the month.
31. Received Birr1,870 from sales for the second half of March.
31. Sales on account totaled Birr1,675 for the month
31. Hill withdrew Birr1,500 for her personal use.
Required:
1. Analyze and record the transactions in a general journal.
2. Post to the ledger using four column accounts.
3. Prepare a Trial Balance.
4. Prepare financial statements (Income statement, capital statement and balance
sheet). Assume that there is no adjustment during on March 31,2011
134 General Business Education Grade 12
Glossary
Absolute advantage: ability to beat competition: the ability of a provider of goods or
services to conduct business more profitably or efficiently than any competitor.
Accountant: somebody who maintains the business records of a person or organization
and prepares forms and reports for tax or other financial purposes.
Accounting: the activity, practice, or profession of maintaining the business records of
a person or organization and preparing forms and reports for tax or other financial
purposes.
Accounting Equation: BUSINESS balance sheet equation; a fundamental balance
sheet equation, such as liabilities + net worth = assets.
Ad valorem: according to value; in proportion to the value of something.
Advertising: public promotion of something; the public promotion of something such as
a product, service, business, or event in order to attract or increase interest in it.
Agent: somebody representing another; somebody who officially represents somebody
else in business.
Assets: owned items; the property that is owned by a person or organization.
Balance Sheet: a statement showing the assets and liabilities of a company or
institution at a particular time.
Bookkeeping: the activity or profession of recording the money received and spent by a
person, business, or organization.
Business: commercial activity which involves the exchange of money for goods or
services.
Bill of Exchange: a document setting out an instruction to pay a particular person a
fixed sum of money on a particular date or when the person requests payment.
Bill of Lading: a list of merchandise being transported, especially by ship, together with
the conditions that apply to its transportation.
Broker: commercial agent; somebody who is paid to act as an agent for others, e.g. in
negotiating contracts or buying and selling goods and services.
Chain store: one of series of stores: one of a series of retail stores, especially
department stores or supermarkets, owned by the same company.
Commission merchant: agent working on commission; an agent who buys and sells
goods for others and is paid on a commission-only basis.
Communication Channel: a course or means of communication or expression.
Comparative advantage: business more efficient production: a higher relative
efficiency in the production of a particular good in one country or company as opposed
to another.
Cost: the amount of money spent in producing or doing something.